Many hotels, malls and real estate companies that were denied input tax credit under Goods and Services Tax (GST) mechanism in certain situations have dragged the government to court over the issue. A writ petition was filed in the Delhi High Court on Monday, challenging a change in the GST framework this year, whereby input tax credits were denied to real estate companies, hotels and malls in cases where construction is undertaken by the company itself, people familiar with the matter said. The amendment to Section 17 (5) of the Central Goods and Services Tax (CGST) Act deals with blocked credit. “Section 17 (5) of the CGST Act and the respective state Acts have led to a paradoxical situation by denying credits as the objective of the GST is free flow of credits when the output is in the course or furtherance of business,” said Abhishek A Rastogi, partner at law firm Khaitan& Co, who filed the writ petition on behalf of real estate companies.
“The impugned provisions are against the objectives of GST and have accordingly been challenged on the grounds of arbitrariness and vagueness.” Tax experts said the phrase ‘on his own account’ in the GST law will need to be interpreted differently if one were to take input tax credit. Input tax credit refers to a mechanism under the GST framework wherein the tax a company pays when it purchases raw materials or other services can be passed on to the buyer when the goods or services are sold. Tax experts say that many companies were unable to claim credit when they themselves constructed malls, buildings or hotels. “The distinction will have to be created between business to business (B2B) and business to consumer (B2C) transactions so that the benefit of credits is not denied,” Rastogi said.